The annual State of Logistics report is just out again with much fanfare from Rosalyn Wilson and CSCMP, with the headline news that overall relative US logistics costs were modestly down in 2013, to 8.2% of GDP, versus 8.5% in 2012.

In 2007, logistics costs rose to a recent record of 9.9% of GDP, as soaring oil prices and tight trucking capacities capped a multi-year surge in logistics costs. By 2009, logistics costs had fallen to just 7.9% of GDP. At 8.2%, we are at the lowest percentage since 2009, still well below that 2007 peak, and substantially below all the years from 2004 through 2008.

Gilmore Says:

We will note here that what the true carrying cost of inventory should be is far from an exact science.

As a comparison, logistics costs as a percent of GDP were estimated at 15.8% in 1981 (as trucking deregulation was just starting and interest rates were high) and 12% in 1985. So as an industry we have made much progress.

To make sense of all that, a graph of the last 10 years of logistics costs as a percent of GDP is provided below.

All told, US logistics expenses, as measured by this methodology, were up 2.3% in 2013, but nominal GDP rose a bit faster than that. Wait, you may be saying, GDP rose only 1.9% in 2013. No, that was the number for the growth of "real" GDP , which reduces nominal GDP by an inflation factor. Since logistics costs in this report are measured in nominal terms (only way to really do it), the comparison has to be against the nominal not real GDP level.

This represents the 25th edition of the report, which was launched in 1988 by the late Bob Delaney and sponsored by his company, Cass Information Systems. Somewhere along the way, CSCMP took over the sponsorship, and in the late 1990s Wilson, who has a long career in the logistics industry, began to support Delaney in his efforts. Upon Delaney's passing a few years later, Wilson took on the challenge alone, largely keeping the existing methodology.

Just for perspective, the total cost of US logistics was estimated at $1.39 trillion for 2013, up $31 billion from 2012. A lot of elements go into that number, from warehouses to trucking to pipelines, but the three main categories are inventory carrying costs, including the costs of warehousing (33.9% of the total logistics spend in 2013), transportation costs (61.5%), and administrative costs, mostly related to logistics IT spend not otherwise captured in the other two categories (just 4.6% of the total).

Within transportation, trucking-related costs comprise 77.2% of total transport costs and 47.5% of total logistics spend, while other modes (rail, water, pipelines, freight forwarders, etc.) account for 22.8% of transportation spend and 14.1% of the total logistics costs.

Source: State of Logistics Report 2014/CSCMP

All those numbers above were little changed in 2013 versus 2012 or really the past few years. Trucking's share of transportation spend fell slightly again, down two-tenths of a percentage point, after a half a percentage point drop the year before.

My guess that is mostly reflective of a fairly weak rate environment in 2013 versus the rail carriers, who commanded somewhat higher rates again. Also, I do not believe this methodology accounts for private fleet activities, unless a dedicated fleet from a commercial carrier is used.

Total rail freight revenue rose 3.6% on a gain in ton-miles of 1.6%. In 2012, rail spend had risen 4.3% on a decline in ton miles, so the pricing power for the rail carriers seems to have diminished a bit versus previous years.

The approximate $1.39 trillion in total logistics spend is 21% above the 2009 bottom, and is higher in absolute terms than any year but the peak year of 2007, when spend was $1.42 trillion.

That seven years later we are still not back to the logistics spending level we saw in 2007 is really amazing, and shows just how deep the great recession really was. Greater logistics efficiency, such as the rise in intermodal volumes, may play some role here, but I’ll note US manufacturing levels are still not back to 2007 levels, though we are at last knocking at the door – the just released numbers for May show the manufacturing index at 99.5, half a point below the 2007 benchmark.

Inventory carrying costs were up 2.8% in 2013, down from a rise of 4% in 2012. But most of that rise in carrying costs in absolute terms came from a similar rise in total inventory levels. The higher the absolute level of inventory, the higher the absolute spend for insurance, taxes, depreciation, etc.

The inventory-to-sales ratio bounced around a bit, but was basically unchanged for the year. After reaching a recent peak earlier in the recession at 1.49, the ISR rate has remained fairly stable in the 1.26 to 1.28% range.

That said, continuing a recent trend, retail inventories are rising faster than those in manufacturing and wholesale distribution. Retail inventories rose 6.2% year over year, and increased in every quarter in 2013.

By comparison, manufacturing inventories rose just 2.1% in absolute terms and wholesale inventories only 2.7%, not much at all when you consider those numbers include growth due to increased sales and any inflation.

We will note here that what the true carrying cost of inventory should be is far from an exact science, and others might calculate this macro-number differently than Wilson does. However, the report has been using the same methodology for years, so year over year the numbers and direction are consistent and do reflect real trends. Interest rates were actually down a bit in 2013, so that mitigated the costs of higher absolute inventories.

The annualized rates for "commercial paper" (short term bonds for corporations) was astoundingly just .9% last year, versus 1.1% in 2012. Obviously, in times of higher interest rates, inventory carrying costs can spike using this approach. Wilson notes that if the 2007 interest rate of 5.07% was substituted, total logistics cost would have increase by $128 billion. This, in turn, would have changed logistics cost as a percent of GDP from 8.2 to 9.0%.

Transportation costs were only up 2% in 2012, down from a 3% rise in 2012. The report basically uses carrier revenues by mode as the measure of transportation spend.

In the trucking sector, spend was up about 1.6%, on tonnage gains said to be 6.1%. That would imply rates are declining, though Wilson characterizes them as flat, and notes the 2013 growth was "one of the weakest revenue years in recent history" for truckers.

This is strange, though good news for shippers. We had strong gains in volumes, at least as measured by tonnage, Wilson said that in 2013 the industry was operating at near full capacity (at least in truckload), and yet rates were flat. Very odd, and a condition that is clearly changing here in 2014.

A few other highlights from the report:

Class 8 truck registrations declined 4.5% in 2013, contributing to the tightness in capacity. The new trucks are so expensive, it makes it difficult for the carriers to afford the upgrades.

The cost of warehousing was up 5.6% in 2013, as rates for warehouse space continue to rise. "Fourth-quarter demand was particularly strong and reached the highest level on record," Wilson says.

Report notes that "More and more drivers are walking away from the industry because of increased burden and decreased wages." The decreased wages are coming from HOS rules and electronic data loggers that reduce miles driven per week.

At the end of 2013, trucking bankruptcies had increased for seven consecutive quarters and were at a three-year high. Report says that the increase in expenses and prohibitive cost of adding new drivers reduced US truckload capacity by 2.5% in 2013.

Given the situation, report says carriers can probably increase rates 5-8% in 2014.

There is more, but that's all I have room for. Nice job as usual by Wilson and CSCMP.

The report is available at no charge for CSCMP members, of which I am one. It can also be purchased by non-members. We will do a video summary in our news broadcast with CSCMP coming up on Monday.

Any reaction to this year's State of Logistics report for 2014? Let us know your thoughts at the Feedback section below.